Bunch Charitable Gifts to Save Taxes

The Tax Cut and Jobs Act (TCJA) introduced some significant changes to the rules concerning itemized deductions. In fact, many of the deductions on Schedule A — the itemized deductions — were repealed or modified in a way that limits their use.

Couple this with the (almost) doubling of the standard deduction and it’s not surprising that many taxpayers are simply taking the standard deduction.

With fewer taxpayers itemizing, certain deductible expenses — in particular, charitable contributions — are no longer providing any federal tax benefit.

Rather than giving up on charitable giving, taxpayers can use a strategy known as “bunching” to maintain some tax benefit for those gifts.

Bunching essentially means lumping multiple years’ worth of charitable contributions in a single year in order to take an itemized deduction in year one and the standard deduction in the following years.

How bunching produces Tax benefits

To help illustrate the tax benefit of bunching charitable gifts let’s look at an example assuming:

  • A couple is married filing jointly, ages 60 & 58
  • Total income reported from various sources is $160,000
  • Line 7 of Schedule A (State and Local taxes) usually totals around $10,500
  • Line 10 of Schedule A (home mortgage interest) is zero, they have no mortgage
  • Line 14 of Schedule A (gifts to charity) is $10,000 per year
  • Taxable income in 2019 is 135,600 (assuming they use the standard deduction of $24,400)
  • Federal tax liability in 2019 is $19,764 based on the IRS tax chart
  • This couple will be taking the standard deduction rather than itemizing, meaning the $10,000 annual gift to charity is no longer tax-deductible
  • These underlying numbers will remain unchanged for each of the years

Running a series of multi-year tax projections produces the following tax outcomes.

Scenario2019 Fed Taxes2020 Fed Taxes2021 Fed Taxes3-Year Tax Savings
No lumping, continue gifting $10,000 each year from cash$19,764$19,764$19,764
Lump sum gift of $30,000 in 2021, standard deduction in 2019 and 2020$19,764$19,764$16,288$3,476

In this case, lumping charitable contributions provides a total tax savings of $3,476 over three years, with the potential for additional tax savings through capital gains avoidance if appreciated stock is gifted.

bunching QUick guide

How do you know if the strategy makes sense? Hopefully, this decision tree will help you determine if you can benefit from bunching your charitable gifts.

Make sure you have your Federal tax return handy. You’ll need it. You can also click this image to expand it.

Keep in mind that other tax strategies — like qualified charitable distributions and Roth conversions — can also be deployed when bunching charitable gifts that can produce additional tax savings!

Ultimately, if it looks like you would benefit from bunching your deductions, I suggest discussing it with your tax advisor. They’ll be able to help you navigate the timing of the gifts and the optimal amount, as well as the other strategies that are applicable to you.

Common Higher-Education Retirement Plans

If you work for a university or college, there is a good chance you have many different types of retirement plans to choose from.

403(b), 401(a), 457 Plans: what’s the difference and how can you optimize using them?

403(b) Plans

403(b) plans were created in the 1950s as a way for teachers and others who work for not-for-profit organizations to save for retirement. The name comes from the section of the tax code the plan was created under. 

Institutions normally offer a “match” or a flat rate that they will contribute to the plan on your behalf. You’re ordinarily required to put in a percentage of your own pay, through salary deferral, to receive employer contributions.

Features:

  • The contribution limit for 2019 is $19,000 if under 50, with a $6,000 catch-up contribution if over 50 for $25,000.
  • You are responsible for choosing the investments within your account.
  • Most plans allow for loans. I don’t encourage using them, but if you exhaust all other options, it is available.

Pros:

  • Most universities/colleges offer employer contributions.
  • Traditional contributions lower your taxable income for that year.
  • Many Plans also offer after-tax (Roth) contributions.

Cons:

  • Many plans offer insurance-based products (annuities) as part of the core line up. These products often have high fees which can be detrimental to long-term financial success.
  • The recommendations, service, and guidance from 403(b) vendors can be inadequate because they are often insurance salespeople who receive large commissions for selling insurance products within the 403(b).

457 Plans

457 plans are available to employees of state/local government agencies and certain tax-exempt organizations.

features:

  • The contribution limit for 2019 is $19,000 if under 50, with a $6,000 catch-up contribution if over 50 for $25,000.
  • Like 403(b)s, you are responsible for choosing the investments within your account.

Pros:

  • If a 403(b) and 457 Plans are offered, you can max out BOTH.
  • If you separate service, there is not a 10% premature withdrawal penalty. This can be especially beneficial if you want to retire in your early to mid-50s.

Cons:

  • While premature withdrawal penalties don’t apply after separating service, required minimum distributions do apply.
  • The 457 plan doesn’t have a match.
  • If the 457 is considered non-governmental, your options for what to do with the funds down the road, such as rolling it into an IRA, can be limited.

401(a) Plans

A 401(a) plan is an employer-sponsored money-purchase retirement plan that allows dollar- or percentage-based contributions from the employer, the employee, or both.

Features:

  • The employer can decide who is eligible to use the plan.
  • These plans often have mandatory employee contributions.
  • The contribution limit in 2019 is $56,000 (employee+employer).

Pros:

  • It can allow for more tax-deferred investing, in addition to other plans.

Cons:

  • These plans are not frequently offered.
  • The plan gives employers more control over their employees’ investment choices.
  • Contributions are sometimes mandatory and a portion of those contributions may be subject to a “mitigating rate” that is used to help fund past service liabilities of the organization’s defined benefit plan.

How to use them together

If you work for an employer that offers all three plans, you are in luck because you can contribute to all three plans at the same time!

A quirk in the IRS code allows you to personally defer $19,000 to the 403(b) plan, $19,000 to the 457 plan, and $19,000 to the 401(a) plan.

If you include employer contributions, a total of $131,000 can be contributed toward your retirement, before any catch-up contributions!

Are You In The Right Room?

I recently had the opportunity to attend a conference in Chicago for the National Association of Personal Financial Advisors (NAPFA).

Attending financial planning conferences is exciting because it gives me an opportunity to get out and learn from other professionals.

But that can also be intimidating.

I’m always concerned that I won’t be able to keep up in conversations with my peers or that I won’t have anything to contribute.

Imposter syndrome really seems to hit me at NAPFA conferences in particular because I’m surrounded by a community of bright, motivated, and successful people that are just as passionate about fee-only financial planning as I am.

Then I remembered this quote: “If you’re the smartest person in the room, you’re in the wrong room.”

People who know everything have nothing to learn. There is no opportunity for growth if there is no room for growth. 

When you find yourself in a space where you are among intelligent, high performers, then you are presented with an incredible opportunity – the opportunity to grow.

I found myself in the right rooms at the conference.

In three short days, I learned helpful techniques to improve my skills as a financial planner and met so many brilliant people, people who are far smarter than me. I was reminded that it’s good to be introduced to concepts that I can use to develop new strategies that help make my client’s lives better.

Rooms, where we feel smart, are safe rooms. They are comfortable rooms, but they are not rooms where we grow.

Take a chance on something that makes you challenge yourself and change will come your way. And always questions if you are in the right room.

Am I Rich?

Growing up I always assumed that being rich meant living in a big house and driving a sports car.

But I’ve learned over the years that having that “stuff” doesn’t make a person rich.

They might have a high income, but they may also spend beyond their means and couldn’t go three months without their high-paying job and still maintain their lifestyle.

They’re in a state where all that stuff burdens them to keep working for the sole purpose of keeping those things.

They’re certainly not rich, they’re just able to afford more debt.

What does rich mean to me?

I think a common mistake we all make is to use the terms “rich” and “wealth” interchangeably.

I don’t believe that the term rich refers to the amount of money you’ve accumulated. That’s wealth.

To me, being rich is a mindset. It’s not some arbitrary dollar figure or my social status. I don’t need the latest and greatest gizmo or gadget. And I don’t care if people see me driving the same car for 10 years.

I just want to live free of debt, I want to be generous with my wealth, and I want to appreciate what I have.

Don’t get me wrong, it’s okay to spend money on things that make us happy. But all that “stuff” alone does not make a person rich.

How to think about being rich

Once we rid ourselves of the assumption that being “rich” means that we have a ton of cash or things, there are so many way-more-meaningful ways to think about being rich, including:

Friends and Family: I consider having good friends and family, basically any group that has your back 100%, to be a sign of being rich. Money doesn’t come close to offering the same type of value that friends and family can offer.

Generosity: Why accumulate wealth if you aren’t able to share it? And I’m not talking about solely giving to charity or the less fortunate either. It just feels nice to buy your friends or family dinner sometimes just because you can.

Hobbies: I believe that having hobbies is essential to happiness. The more hobbies we have, the more productive that we tend to feel especially after the drain of full-time work is off of our shoulders. 

Community: This kind of goes hand-in-hand with hobbies. We’re social creatures by nature, and communities help to nurture what comes naturally to the majority of us. Surround yourself with like-minded individuals who have a common goal/interest and you’ll instantly feel richer.

How do you think about being rich? What are other ways of considering yourself rich?

Teaching Kids About Money

I don’t have kids of my own, so I asked my colleague Stacy Antrobus to help write this post. Stacy is the Practice Manager at Precedent AM and has two young children that she is teaching the value of money and the role it plays in their lives.

Passing down values related to money is one of the most crucial, yet challenging, tasks for parents today.

A child’s experience with money during their developmental years can shape how they save, spend, and give for the rest of their life.

By setting a positive example, and having meaningful conversations with your children, you can teach the following three key lessons about money management.

Teach them how to save

Helping children think beyond current wants and desires is not easy, which is why demonstrating the value of saving up for something is best accomplished through real-life examples.

To help your child think beyond current wants and desires, they need to first understand that the money they receive is directly tied to the work they do.

For example, you could create a chart that lists chores plus the pay rate for each of those chores. Loading the dishwasher might be $0.75, taking out the garbage could be $1, vacuuming for $2.

When your child asks for a toy, let them know that they have to buy it with their own money now — or that they save their money and buy something they REALLY want later. Help them count how much they have available and then how much more they need to earn to buy the toy.

Of course, there are many other examples and exercises to teach children the value of a dollar saved. The key is to explain the concept along the way, so children both hear and see best practices in action.

You may also expose your children to long-term savings by bringing them to appointments with your financial advisor. These trips can give you the opportunity to explain the things you are saving for — like retirement or college funding — and can demonstrate to your child the importance of planning ahead.

Teach them how to spend

While it’s hard to let you kids fail sometimes, teaching them that actions have consequences is a lesson that goes far beyond money.

Rather than telling them, “no, you can’t buy that,” it’s okay to let them experience the process of spending their money so they can learn when it’s gone, it’s gone.

Another valuable lesson is to look at what options are available and how to comparison shop for prices and quality.

Guiding children in simple choices now will give them the experience and confidence to make their own decisions as they grow.

Teach them how to give

Teaching kids about giving can be rewarding for both parents and children. Learning about giving and helping others gives kids a feeling of empowerment.

There are many ways a child can learn the value of giving. Setting up a charity box in the home can show how even a little bit of money can make a difference when given with a good heart. Encourage them to donate old toys, school supplies, and clothing to other needy children.

It is also a good idea to teach your little ones that donating time is often just as powerful as donating money and things. Take the whole family for an outing serving dinner at a local soup kitchen or make a habit of keeping a basket of fruit or snacks in the car to give to hungry people in need.

Encouraging everyone in your household to participate in volunteer activities is a great way to reinforce charitable values in your children.

By teaching your children that money needs to be earned, saved and shared responsibly, they stand a better chance of being able to successfully navigate their own finances as an adult — and rely less on you!